Article 25 of the EU's alternative investment fund managers directive (AIFMD) states that national competent authorities (NCAs) will assess the risks that the use of leverage by an alternative investment funds manager (AIFM) could entail. Where necessary, NCAs can address the risks identified by imposing limits to the level of leverage that an AIFM is entitled to employ or other restrictions on the management of the AIF. ESMA's Guidelines on Article 25 of the AIFMD issued in 2020 operationalise this framework by setting out a common approach to identify and assess funds posing leverage-related risks. As a macroprudential framework, the Guidelines put the emphasis on the risks posed by groups of AIFs of the same type and similar risk profiles that may collectively present a risk to financial stability. This article contributes to ESMA's financial stability objective by presenting the AIFMD Art. 25 framework and the results of the risk assessment performed by ESMA and NCAs in 2023, based on the end of 2022 AIFMD data. One focus of the 2023 risk assessment are the risks posed by real estate (RE) funds. It finds that RE funds pose low risks on an individual basis, due to their limited use of leverage or size in most jurisdictions, but could be more systemically relevant in jurisdictions where groups of funds own a large share of the RE market on aggregate. This is the case in Ireland where the Central Bank of Ireland (CBI) imposed leverage limits for those funds. NCAs have also reported risks posed in one ancillary fund category, the "other" funds which is by far the largest category in the sample. This is especially the case for liability-driven investment (LDI) funds, which gain leveraged exposures to the UK government bond market. Following the severe stress experienced by LDI funds in September 2022, authorities in Luxembourg and Ireland communicated on the suitable levels of resilience (i.e. the increase in yields that a fund can withstand before its NAV turns negative) those funds should maintain. They also implemented additional data collection on LDI funds to monitor them on an enhanced basis. As potential risks have remained elevated, NCAs are consulting on maintaining such resilience requirements under Article 25 AIFMD. Overall, we find that the implementation of the ESMA Guidelines, as reflected by the risk assessment reported, is improving the monitoring of the EU AIF sector. At the national level, NCAs generally managed to overcome existing AIFMD data gaps by using additional data sources and other information from fund managers to have an accurate view of the risk in their jurisdiction. This article complements ESMA's monitoring framework on AIFs, including the AIF market report that reports annually on market development and key risk metrics, such as leverage and liquidity.
